UPDATE 1-UBS says new oil sands projects need pricey crude

(Adds details on shares, updates prices. In U.S. dollars unless noted)

CALGARY, Alberta, Sept 19 (Reuters) - New oil sands mine projects need crude prices to remain over $100 a barrel to turn a decent profit, analysts at UBS Securities said on Friday following Petro-Canada's PCA.TO announcement that costs for its planned Fort Hills project had soared by more than half.

Andrew Potter, an analyst at UBS, said rising costs have raised the bar for massive oil sands projects, as inflated costs for labor in particular, eat into owners’ profits. That could force a number of projects in the region to be delayed, reworked or sold.

“Producers will have to defer projects to get a handle on costs,” Potter said. “You’ll probably also see more joint ventures with U.S. refiners because that, in my view, is probably still a cheaper alternative to building an upgrader in Alberta. And you may see more bitumen-only projects go ahead ... and you will see some corporate consolidation.”

Petro-Canada said on Wednesday that the price of its 140,000 barrel per day Fort Hills project had risen by at least 50 percent from a year earlier estimate to C$21 billion ($20 billion).

However, Potter estimates the project will cost at least C$25.3 billion, including initial design and management costs left out of Petro-Canada’s forecast.

The oil sands contain an estimated 173 billion barrels of oil, a resource second in size only to Saudi Arabia’s reserves. More than C$50 billion has already been spent to tap the resource and a further C$100 billion has been pledged to new projects.

Inflation has been the oil sands’ hobgoblin, with the costs of some projects doubling as the price of steel and other materials has skyrocketed and companies find it difficult to find skilled labor pool in remote northern Alberta.

Where oil prices of $75 a barrel had been adequate to ensure a good profit, Potter said $100 a barrel is now likely needed to produce a 10 percent return.

Others estimates are even higher, with William Lacey, an analyst with FirstEnergy Capital, forecasting that the Fort Hills project will need crude at $115 a barrel.

Oil prices, which surged to more than $147 a barrel in July, have fallen swiftly since, but jumped on Friday to $104.55, up $6.67 on the day, on optimism that a rescue package engineered by the U.S. government would stabilize a battered financial sector.

The jump in oil prices pushed the shares of oil sands producers sharply higher on the Toronto Stock Exchange.

Suncor Energy Inc SU.TO, the No.2 oil sands producer skyrocketing more than 12 percent, or C$5.59, to C$5.59.

Canadian Natural Resources Ltd CNQ.TO, which is starting up its Horizon oil sands project, jumped C$8.66, or 11.1 percent, to C$86.66 and Canadian Oil Sands Trust, the biggest owner of the Syncrude Canada Ltd oil sands project, rose C$6.70, or 18 percent, to C$44.95, despite fears that shares may have rebounded too much on Friday.

“We’ve had a fantastic rally but I’m a little bit skeptical,” said Lacey, “I don’t think we’ve solved all of the (problems) that are out there.”


Petro-Canada has a 60 percent share in Fort Hills, which includes an oil sands mine north of Fort McMurray, and an Edmonton-area upgrader to turn the mined bitumen into refinery-ready synthetic crude. UTS Energy Corp UTS.TO and Teck Cominco TCKb.TO each hold 20 percent of the project, which would be the fifth major mining project in the region when completed in 2012.

A planned second phase would push output to 280,000 bpd by 2015.

Petro-Canada blamed the huge cost increase on rising materials prices, a tight labor supply and higher project management expenses.

Potter said rising construction costs may give an advantage to less labor-intensive thermal projects, where steam is pumped into wells to liquefy the tarry bitumen so it can flow to the surface.

“I would presume (thermal projects) will still see inflation but I don’t think it’s going to be as bad as on the mining side,” Potter said.

$1=$1.05 Canadian Reporting by Scott Haggett; editing by Rob Wilson